Explained: Why is RBI aligning accounting year with fiscal year?

When it commenced operations on April 1, 1935, with Sir Osborne Smith as its first Governor, the RBI followed a January-December accounting year.

Written by George Mathew
| Mumbai |
Updated: February 19, 2020 8:13:53 am

The RBI’s balance sheet plays a critical role in the functioning of the country’s economy — largely reflecting the activities carried out in pursuance of its currency issue function, as well as monetary policy and reserve management objectives.(File)

The Reserve Bank of India (RBI) is aligning its July-June accounting year with the government’s April-March fiscal year in order to ensure more effective management of the country’s finances.

How did the RBI’s July-June accounting year come to be?

When it commenced operations on April 1, 1935, with Sir Osborne Smith as its first Governor, the RBI followed a January-December accounting year. On March 11, 1940, however, the bank changed its accounting year to July-June. Now, after nearly eight decades, the RBI is making another switch: the next accounting year will be a nine-month period from July 2020 to March 31, 2021 and thereafter, all financial years will start from April, as it happens with the central and state governments.

Why are RBI’s accounts important?

The RBI’s balance sheet plays a critical role in the functioning of the country’s economy — largely reflecting the activities carried out in pursuance of its currency issue function, as well as monetary policy and reserve management objectives. The RBI Act says the central bank “shall undertake to accept monies for account of the Central Government and to make payments up to the amount standing to the credit of, and to carry out (its exchange), remittance and other banking operations, including the management of the public debt”.

The RBI is the country’s monetary authority, regulator, and supervisor of the financial system, manager of foreign exchange, issuer of currency, regulator and supervisor of payment and settlement systems, banker to the central and the state governments, and also banker to banks.

But why is the system being changed?

The Bimal Jalan Committee on Economic Capital Framework (ECF) of the RBI had proposed a more transparent presentation of the RBI’s annual accounts, and a change in its accounting year to April-March from the financial year 2020-21. It said the RBI would be able to provide better estimates of projected surplus transfers to the government for the financial year for budgeting purposes.

It is also expected to result in better management of transfer of dividend or surplus to the government. Moreover, as governments, companies, and other institutions follow the April-March year, it will help with effective management of accounting. In May 2018, when Urjit Patel was Governor, the RBI appointed its first ever Chief Financial Officer (CFO), Sudha Balakrishnan.

The change in the fiscal year could reduce the need for interim dividend being paid by the RBI, and such payments may then be restricted to extraordinary circumstances. It will obviate any timing considerations that may enter into the selection of open market operations or Market Stabilization Scheme as monetary policy tools. It will also bring greater cohesiveness in monetary policy projections and reports published by the RBI, which mostly use the fiscal year as the base.

Last fiscal, the RBI paid Rs 28,000 crore as interim dividend; in 2017-18, the government received Rs 10,000 crore. In RBI’s balance sheet, while capital and reserve fund are explicitly shown, other sources of financial resilience are grouped under ‘Other Liabilities and Provisions’ and enumerated via Schedules, making it difficult to arrive at total risk provisions, the Jalan panel said.

In August 2019, the RBI transferred Rs 1,76,051 crore to government, comprising Rs 1,23,414 crore of surplus for 2018-19, and Rs 52,637 crore of excess provisions identified as per revised ECF proposed by the Jalan panel.